Another Minnesota city is debating jumping on the municipal broadband wagon and ignoring the risks and disastrous fate of similar projects.
This time it's some on the Rochester City Council and Rochester Public Utilities who seek to join nearly 450 communities that have invested over $2 billion to construct, own and operate some form of taxpayer-funded, government-owned Internet service. Before the Rochester broadband proposal moves ahead, everyone should be aware of one crucial fact: Many local governments that have invested in city-owned Internet services have left taxpayers and bondholders with returns of pennies on the invested dollar and created a huge financial mess.
One reason for the failure of these Internet systems is the rosy projections offered to local officials in the form of free studies that show the local community is clamoring for faster speeds and better service based upon low construction costs estimates. The reality is that nearly every one of these assumptions is wrong, and it doesn't take a lot of wrong assumptions to do a lot of harm to bond holders and taxpayers.
For example, construction costs for building fiber-to-home broadband service is nearly universally underestimated, both in terms of construction costs and likely subscribers. Nearly 12 months ago when this issue first came before the city council, the Post-Bulletin reported that preliminary construction costs were estimated to be $42 million. The presentation currently before the council projects costs of $53 million and once bonds are issued an even higher price tag of $67 million.
It is likely that construction costs will continue to rise in the months ahead and building a citywide network could cost upwards of $70 million before a single customer would be served. Unfortunately, these costs will be borne by every Rochester taxpayer regardless of their need or desire to ultimately subscribe to the city-owned network.
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Hiding details from the public about the risks of a city-owned system can be devastating — just ask Burlington, Vt., taxpayers who are still feeling the burn from their experience with a government-owned network. Burlington officials took out loans totaling $33.5 million from Citibank to underwrite its broadband project.
Cost overruns forced city officials to borrow an additional $17 million from cash reserves to get the project operational. This massive "bailout took place without any official approval, [and] ultimately led to the resignation of the city's chief financial officer," according to a recent Taxpayers Protection Alliance report on 12 of the most wasteful municipal broadband networks titled "The Dirty Dozen."
When subscribers didn't materialize, Burlington's troubles continued. Citibank sued the city in an attempt to recover its initial investment, which forced the city into a settlement with the bank.
Ultimately, "the city now pays to lease the broadband network it forced local taxpayers to spend millions of dollars to construct," according to the Taxpayers Protection Alliance report. The city's bonds are now nearly as valuable as junk bonds and their credit rating will take years to recover. Oh, and the city is still $7.3 million in debt.
Monticello, Minn., residents learned much the same lesson: constructing a city-owned and operated Internet service is costly and risky. Construction of Monticello's $16.8 million network began in 2010 funded by city-issued bonds. After the system was operational two years later, officials were stunned to learn than subscriber projections were completely off from initial projections.
Apparently the old axiom "if you build it they will come" doesn't work when market forces prevail in the highly competitive Internet marketplace.
Faced with only 1,270 subscribers to Fibernet Monticello, elected officials began a massive bailout of the system by using a $3.1 million loan from the city's municipal liquor store and an additional $323,000 from the city's general fund. These cash infusions weren't enough to keep the system afloat: After losing $4 million of taxpayer's money the city defaulted on loan payments and joined the ranks of communities who saw their credit rating tumble after risking taxpayer dollars on a municipal broadband network that, according to court records, was never going to be financially viable.
There are many more failed municipal broadband systems but the outcomes are often the same: promises made about government-owned internet systems are often promises not kept.
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The Dirty Dozen report states: "By any objective measure, the growth of municipal broadband networks has been one of the most disastrous movements to hit local and state governments in decades. Government internet projects unnecessarily put tax dollars at risk, needlessly reduce the resources available for valuable government services and unfairly compete against private businesses in the marketplace."
Rather than risking and diverting precious Rochester taxpayer dollars on a questionable plan to construct a city-owned network, elected officials would be wise to consider advances underway by private sector Internet providers and to work with those providers who seek to better serve the city with greater innovation that Rochester desires and deserves.
Annette Meeks is the CEO of Freedom Foundation of Minnesota.
